With Emanuel Macron and Marine Le Pen moving on to next Sunday’s (May 7) runoff French presidential election, first-round results proved right in line with the polls. One would typically expect “as expected” results to elicit minimal market reaction. But we live in the age of derivatives, hedging and speculation. Markets – especially European – were buoyed, once again, this week by the reversal of hedges and short positions.

I start with a simple definition: “A Bubble is a self-reinforcing but inevitably unsustainable inflation.” Bubble terminology is used in various contexts and means different things to different folks. To most analysts, talk of a “Bubble” connotes something that is about to burst. I take a different approach, working to identify initial factors and characteristics that are favorable for Bubble formation - and then monitoring and analyzing developments and ramifications. I covered the mortgage finance Bubble from every angle on a weekly basis for over six years, after initially warning of its development in early-2002. It’s now been over eight years analyzing the global government finance Bubble – the “Granddaddy of All Bubbles.”

There’s an interesting dynamic that I’ve lived through a few times now. These Bubbles inflate for years – much longer than would seem reasonably possible. And the longer they survive the more dismissive conventional analysts (and the business media) become to Bubble analysis. At the same time, over time as a Bubble gains momentum there becomes overwhelming evidence and analytical support for the Bubble view. My feelings these days recall 1999 and 2007 experiences: I have great conviction in the analysis, while conventional analysis turns increasingly bullish and dismissive of what have become increasingly conspicuous (and precarious) market distortions and excesses.

Unsound Finance gets to the heart of the issue. Looking back historically to early economic thought, the recurring issue that perplexed deep thinkers was how an economy that appeared robust could suddenly run so amuck. Economic busts would invariably focus analytical attention to “money,” debt and banking.

While discerned by few, Credit turns progressively less stable over the course of an economic upcycle. Especially during the late-cycle boom phase, there would be a huge divergence between general confidence and the underlying deterioration in the quality of rapidly expanding Credit. At some point the boom begins to falter, resulting in a tightening of bank lending. Latent fragilities were soon exposed, traditionally leading to fear, panic, bank runs and such.

My fundamental premise is that we’re in the late-stage of a historic global experiment in unfettered finance. From a historical and analytical perspective, Credit is inherently unstable. Today’s Credit is acutely unstable on a global basis as never before. The bullish counter argument holds that central bankers will ensure financial and economic stability. And with central banks willing to employ negative rates and limitless massive monetization, confidence in the bullish view is higher than ever. As such, today’s divergence between confidence and the underlying soundness of finance has never been as wide – ever. The bullish view holds that central banks are the solution. They’re undoubtedly the problem.

Especially with the view that the Trump Administration will aggressively pursue tax cuts and deregulation, optimism is running high that pent up real economy potential is about to be unleashed. Despite a weak Q1, some forecasts call for 3% GDP growth in Q2. Monitoring increasingly overheated real estate markets and stubbornly low bond yields, I would not be surprised by a decent economic uptick. Yet there are myriad fault lines that could bring this party to an abrupt end.

The Dilemma of Unsound Finance prevails just about everywhere – most notably China, Japan, Europe, EM, Canada, the U.S, Australia, etc. There are numerous potential flashpoints – where Unsound Finance has turned acutely vulnerable. While central bankers talk employment and CPI, I believe fear of global financial instability has been the true impetus behind “whatever it takes.”

April 28 – Bloomberg: “New shadow banking measures may be unveiled and China’s central bank will probably continue to raise money-market rates after President Xi Jinping met with the country’s top officials over risks to the financial system this week, according to Nomura Holdings Inc. Xi gathered with members of the Communist Party Politburo and the chiefs of China’s four financial regulators April 25, ordering them to prevent systemic risks. Concern over a regulatory crackdown has whipsawed Chinese assets over the past two weeks. ‘We expect stricter financial regulatory measures to be rolled out, which we believe should be seen as targeted tightening, particularly in the shadow banking system, to de-leverage financial speculation and reduce capital outflows,’ Nomura analysts Zhao Yang and Wendy Chen wrote…”

Chinese officials are grappling with an epic Credit Bubble and the resulting greatest expansion of finance in history. This week saw further pressure on Chinese stocks and bonds (See China Watch below). Last year’s measures to stabilize the country’s collapsing stock market, slow enormous capital flight and juice the faltering economy pushed China’s housing Bubble (and shadow banking) to ridiculous extremes. Chinese officials will now attempt to impose more strenuous measures to rein in financial excess without slowing the economy or bursting Bubbles. Global markets for the most part remain sanguine – not that they anticipate policymaker success but rather because they are confident that Beijing will not risk bursting Bubbles. Markets believe they have time.

April 23 – Wall Street Journal (Carolyn Cui, Ian Talley and Ben Eisen): “Emerging-market companies are binging on U.S. dollar debt and that could become a source of trouble in some parts of the world if growth slows, interest rates rise or the dollar resumes its ascent. Governments and companies in the developing world sold $179 billion in dollar-denominated debt in the first quarter, the most dollar debt ever raised in the first quarter and more than double the amount raised during the same period last year, according to… Dealogic. In all, U.S. dollar debt stood at $3.6 trillion in emerging markets through the third quarter of 2016, an all-time high... Including local currency debt, and emerging-market companies have increased their borrowing by a staggering $17 trillion since 2008, according to the Institute of International Finance.”

I have argued for a while now that EM Finance is Unsound. Over the past year, Chinese reflation coupled with global QE spurred a major short squeeze followed by an onslaught of (performance-chasing) EM inflows. As always, EM economies show alluring potential – so long as international inflows boost asset prices, lending and investment. To have EM binging again on dollar-denominated debt should be a troubling development for anyone paying attention.

It’s worth noting that Germany’s DAX index has gained 8.3% y-t-d, increasing one-year gains to 20.5%. Booming European equities are not limited to Germany. France’s CAC 40 has risen 8.3% so far this year (18.9% 1-yr), Spanish stocks 14.6% (15.6%) and Italian 7.2% (8.6%). Euro zone consumer price inflation has rebounded to about 2% annualized, while corporate risk premiums have declined to near three-year lows. Meanwhile, March broad money supply (M3) jumped to 5.3% y-o-y, the strongest monetary expansion since 2009. Yet the ECB Thursday held firm with about $65bn monthly QE and short-rates at zero or lower. European bank stocks jumped 4.8% this week, increasing 2017 gains to 8.0%.

European periphery debt spreads narrowed this week. French to German 10-year yield spreads collapsed 16 bps. Spanish bond spreads narrowed 11 bps, and Portuguese spreads narrowed 26 bps. Notably, Italian spreads narrowed only 4 bps, remaining close to multi-year wides. European debt markets have evolved into huge Bubbles. How much speculative finance has shorted German bunds to fund higher-yielding bonds from Italy, Spain and Portugal? How large is the “carry trade” – short zero-yielding Japanese instruments to leverage in higher-yielding European periphery corporate and sovereign debt?

The yen dropped 2.2% this week. The yen continues to provide an intriguing “Risk On vs. Risk Off” indicator. Not only has the Bank of Japan’s (BOJ) open-ended QQE created massive amounts of liquidity to bolster Japanese and global securities markets. BOJ policy has incentivized speculators to short yen instruments for cheap finance to acquire higher-yielding bonds around the globe – likely including European, Chinese and EM instruments.

My opening paragraph noted that we live in the age of derivatives. To what extent these “carry trades,” and leveraged speculation more generally, are accomplished through derivative transactions is an important issue. Not only would such imbedded leverage create latent fragilities, it also ensures transparency issues. There is ample evidence that huge amounts of finance have exited Europe, Japan, China and EM over recent years to participate in king dollar. Yet I believe such flows are not adequately reflected in Fed data. Could the explanation be that the proliferation of derivative strategies has distorted traditional flow data?

I go down this path because I was asked this week by an astute observer of the world how the bursting of the global Bubble might play out. I contemplate various scenarios and tend to look at this most extraordinary backdrop and think “expect the unexpected.” Nevertheless, I’ll throw out a possible scenario.

After years of astounding expansion, China’s leading banks occupy the top four spots in the list of the world’s largest banks (by assets). Chinese finance has become hopelessly Unsound, with a Credit Bubble fueling epic malinvestment, asset Bubbles, fraud and deep financial and economic structural impairment.

A bursting Bubble would rather quickly see a crisis of confidence throughout China’s opaque financial system, certainly including “shadow banking” and “repo” finance more generally. I would expect collapsing real estate prices and economic dislocation to spur capital flight. There would be enormous pressure to unwind “carry trades,” greatly pressuring the Chinese currency. A collapsing currency would further impair Chinese borrowers, especially those (banks) exposed to dollar-denominated debt. Chinese officials would see no alternative than to impose strict capital control. The Chinese crisis would spur global “Risk Off” – de-risking, de-leveraging dynamics that I would expect to be particularly problematic for Europe and EM.

A “Risk Off” spike in European periphery yields and a widening of spreads would be a major issue for the thinly capitalized European banks. And with the European banking organizations having become such major players in derivatives, securities finance and EM, a crisis of confidence in European finance would quickly become a systemic issue globally.

This scenario could be viewed as positive for king dollar – and perhaps, to some, even favorable for U.S. securities markets and the American economy more generally. The perception is that U.S. finance is sound and the economy stable. I have serious doubts, believing deeply unsound finance has inflated a U.S. Bubble economy with latent fragilities.

I would expect global “Risk Off” to illuminate enormous amounts of speculative leverage throughout U.S. securities markets, most notably in corporate Credit. I would not be surprised if global markets freeze up – a “flash crash” that would be more than a flash in the pan. Illiquid global markets would be perilous to derivative players that rely on dynamic trading strategies to hedge portfolio exposures. This would curtail sales of cheap market “insurance” that have been instrumental in bolstering risk-taking throughout the securities markets. A resulting sharp tightening of financial conditions would expose the degree to which uneconomic enterprises have flourished in the almost nine years of free “money.” Corporate America would have huge exposure to a faltering global economy, with the major financial institutions all caught up in the global crisis of confidence in derivatives and counter-party issues. And there’s the issue of Trillions that have flowed into perceived safe and highly liquid ETFs. Now that’s some Unsound Finance.

But it’s not necessary to ponder the future to see how Unsound Finance comes back to haunt the system. This week the Trump Administration released a broad outline of its plan for tax cuts and reform. Eight years of zero rates, ultra-low Treasury yields, record stock prices and booming asset markets have fed the dangerous delusion that deficits don’t matter. The central bank blank checkbook has salivating politicians believing they enjoy a similar luxury. And while one article raised the “bond vigilante” issue, for the most part markets remain happy to oblige.

It’s not difficult to present analysis showing 3% (why not 4 or 5%?) growth creating ample revenues to offset major tax cuts. But after eight years of egregious monetary stimulus, one can easily envisage a scenario where growth surprises to the downside. And it is not a totally crazy notion to ponder growth faltering concurrent with a rise in Treasury borrowing costs. Such a scenario would likely see a bursting of assets Bubbles and a resulting collapse in revenues throughout the government sector. There’s as well all the entitlements and unfunded pension plans. When things turn sour globally, we’ll be spending a lot more on national defense. Unsound Finance always comes back to bite. The worrying part is that the world has never experienced anything comparable to the past 30 years.

The U.S. dollar index fell 0.9% to 99.05 (down 3.3% y-t-d). For the week on the upside, the Swedish krona increased 1.6%, the euro 1.6%, the British pound 1.1%, the Norwegian krone 1.0%, and the Swiss franc 0.2%. For the week on the downside, the New Zealand dollar declined 2.2%, the Japanese yen 2.2%, the South African rand 1.9%, the Canadian dollar 1.1%, the Brazilian real 0.9%, the Australian dollar 0.7%, the South Korean won 0.3% and the Mexican peso 0.1%. The Chinese renminbi slipped 0.11% versus the dollar this week (up 0.75% y-t-d).

April 27 – Bloomberg (Brian Chappatta and Liz McCormick): “The Trump administration’s tax plan -- and its disregard for the effect it would have on the federal budget deficit -- is certain to pique the interest of a long-dormant segment of bond investors. So-called bond vigilantes, once feared for enforcing restraint on spendthrift governments, have struggled to flex their muscles in recent years as global central banks stepped in to buy a glut of sovereign debt. Now may be the time for a comeback, with the Federal Reserve talking about trimming its Treasury holdings while the administration’s tax plan could spur more borrowing to cover a shortfall (assuming the projected economic growth doesn’t materialize).”

April 25 – Financial Times (Sam Fleming and Barney Jopson): “In seeking to scythe the corporate tax rate to 15% Donald Trump can claim to be pursuing longstanding campaign pledges to make the US more competitive and revive economic growth. But whether the president’s expected tax-cutting demand will bolster the chances of reform actually happening this year in Congress is a very different question. Attempting such a steep cut in the key rate would raise a host of procedural questions within Congress if the headline-grabbing reduction is not offset with revenue-raising measures elsewhere. It would also sound alarm bells among deficit hawks in the GOP, given that the US is facing a renewed ballooning of its budget deficit.”

April 26 – New York Times (Peter Baker): “A white cloth napkin, now displayed in the National Museum of American History, helped change the course of modern economics. On it, the economist Arthur Laffer in 1974 sketched a curve meant to illustrate his theory that cutting taxes would spur enough economic growth to generate new tax revenue. More than 40 years after those scribblings, President Trump is reviving the so-called Laffer curve as he announces the broad outlines of a tax overhaul… What the first President George Bush once called ‘voodoo economics’ is back, as Mr. Trump’s advisers argue that deep cuts in corporate taxes will ultimately pay for themselves with an explosion of new business and job creation.”

April 28 - Reuters (Stephen J. Adler, Steve Holland and Jeff Mason): “U.S. President Donald Trump said… a major conflict with North Korea is possible in the standoff over its nuclear and missile programs, but he would prefer a diplomatic outcome to the dispute. ‘There is a chance that we could end up having a major, major conflict with North Korea. Absolutely,’ Trump told Reuters… Nonetheless, Trump said he wanted to peacefully resolve a crisis that has bedeviled multiple U.S. presidents… ‘We'd love to solve things diplomatically but it's very difficult,’ he said.”

April 28 – Bloomberg (Jeff Mason, Steve Holland and Stephen J. Adler): “President Donald Trump’s pledge to repeal Obamacare ran into a Republican buzz saw. Now, his ambitious proposal to cut taxes is again encountering GOP opposition -- from lawmakers in Democratic-leaning states. Within a day of Trump’s top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin releasing a dozen bullet points outlining the administration’s tax goals, at least three House Republicans criticized one of the key provisions -- eliminating the deductibility of state and local taxes -- estimated to raise $1.3 trillion over a decade.”

April 28 – Bloomberg (Jeff Mason, Steve Holland and Stephen J. Adler): “President Donald Trump downplayed the severity of a potential government shutdown on Thursday, just two days shy of a deadline for Congress to reach a spending deal to avert temporary layoffs of federal workers. ‘We'll see what happens. If there's a shutdown, there’s a shutdown,’ Trump told Reuters…, adding that Democrats would be to blame if the federal government was left unfunded. Congress has until 12:01 a.m. ET on Saturday to pass a bill to fund the government or face a shutdown, which would temporarily lay off hundreds of thousands of federal workers.”

April 25 – Bloomberg (Jennifer Epstein and Joe Light): “U.S. President Donald Trump intensified a trade dispute with Canada, slapping tariffs of up to 24% on imported softwood lumber in a move that drew swift criticism from the Canadian government, which vowed to sue if needed… ‘We’re going to be putting a 20% tax on softwood lumber coming in -- tariff on softwood coming into the United States from Canada,’ Trump said…”

April 26 – CNBC (Ed Lane): “U.S. Secretary of Commerce Wilbur Ross told the Wall Street Journal that trade actions on aluminum, semiconductors and shipbuilding are under review as well as plans to start free-trade talks directly with Japan, the United Kingdom and European Union even as plans to look at existing free-trade pacts with South Korea and the North America free Trade Agreement (NAFTA). In a wide ranging interview, Ross, 79, pledged to look at issues as diverse as providing support to Westinghouse Electric Co., the nuclear-reactor company owned by Japan's Toshiba that filed for bankruptcy protection in the U.S. last month.”

China Bubble Watch:

April 28 – Bloomberg: “Chinese companies’ borrowing costs have surged to a two-year high relative to the government’s, with an intensifying crackdown on leverage persuading investors to cut holdings of riskier assets. The yield premium that investors demand to hold top-rated bonds over the sovereign surged to a two-year high of 1.5 percentage points this week, the most since April 2015. The gap was driven mainly by a tumble in company notes, with the three-year, AAA rated yield surging 42 bps in the nine days through Tuesday… China’s bond market is feeling the heat of increased scrutiny on the use of borrowed money to invest in financial assets…”

April 23 – Bloomberg: “China’s boom in wealth-management products worth trillions of dollars, under scrutiny from regulators because of potential threats to financial stability, is slowing for now. Outstanding products issued by banks stood at 29.1 trillion yuan ($4.2 trillion) as of March 31, up 18.6% from a year earlier… The growth rate slumped from 53% during the same period last year, CBRC said. WMPs -- popular among individual and corporate investors for their high yields -- have almost tripled in value over the past three years, dominating China’s shadow-banking sector. Regulators have recently stepped up efforts to clamp down on the potential risks.”

April 24 – Bloomberg: “Rising defaults in China are unearthing hidden debt at companies across the country. Small firms that can’t get loans by themselves have been winning banks over by getting other companies to guarantee their borrowings. The companies making those pledges exclude them from their balance sheets, leaving creditors in the dark. Borrowers often extend the guarantees for each other, raising the risk that failures could ricochet, at a time when increasing borrowing costs have already added to strains. China’s banking regulator has ordered checks of such cross-guaranteed loans, Caixin reported… Scrutiny is mounting after a corn oil producer in the eastern province of Shandong said last month it had guaranteed debt of a neighboring aluminum product manufacturer which is now stuck in a cash crunch. Just days before that, a local government financing vehicle in China’s southwest had to repay an auto parts maker’s loans it had guaranteed after the latter defaulted.”

April 24 – Bloomberg: “A $1.7 trillion source of inflows into Chinese markets has suddenly switched into reverse, roiling the nation’s money management industry and sending local bonds and stocks to their biggest losses of the year. The turbulence has centered on so-called entrusted investments -- funds that Chinese banks farm out to external asset managers. After years of funneling money into such investments, banks are now pulling back in response to a series of regulatory guidelines over the past three weeks that put a spotlight on the risks. Critics have blamed entrusted managers for adding leverage to China’s financial system and reducing transparency. The banks’ withdrawals helped erase $315 billion of stock market value over the past six days and sent bond yields to the highest level in nearly two years…”

April 25 – New York Times (Keith Bradsher): “In China, it’s all about whom you owe. That precise question — who owes what to whom? — shook the Chinese industrial town of Zouping in recent weeks. Some businesses closed. City officials engineered a desperate corporate takeover. An executive was detained by the police. The problem: Local companies had agreed to guarantee hundreds of millions of dollars of one another’s loans. When some of those loans went bad, the impact rippled across the city. Zouping’s plight offers a sobering example of the problems that could lurk within China’s vast and murky debt load. A nearly decade-long Chinese lending spree drove growth but burdened the economy with one of the world’s heaviest debt loads, equal to $21,600 worth of bank loans, bonds and other obligations for every man, woman and child in the country. Debt in China has expanded twice as fast as the overall economy since 2008.”

April 23 – Reuters (Josephine Mason and Yawen Chen): “China's insurance regulator said on Sunday it will ramp up its supervision of insurance companies to make sure they comply with tighter risk controls and threatened to investigate executives who flout rules aimed at rooting out risk-taking. The China Insurance Regulatory Commission said… it had told companies to strengthen controls in 10 areas, including liquidity risk and capital management, and implement 39 measures to stamp out risky investments and behavior.”

April 28 – Bloomberg: “A bond market rout in China has triggered the most bond sales to be canceled in a year. Chinese firms have scrapped 120 billion yuan ($17.4bn) of note offerings so far this month, the most since April 2016, according to Bloomberg-compiled data. China Vanke Co., the nation’s second-biggest residential developer, canceled 3 billion yuan in debt sales scheduled for Wednesday, citing changes in market conditions…”

Europe Watch:

April 24 – Wall Street Journal (William Horobin and Stacy Meichtry): “Centrist Emmanuel Macron and far-right politician Marine Le Pen led the first round of voting in France’s presidential election as voters redrew the political map, placing the European Union at the center of a new divide. Mr. Macron won the first round with 23.8% of the vote, …ahead of Ms. Le Pen with 21.5%. The vote marks a stunning rebuke of France’s mainstream political forces. For more than four decades, a duopoly of conservative and socialist presidents has alternated in the Élysée Palace, squeezing out fringe parties as well as mavericks seeking to end the country’s political and economic sclerosis.”

April 26 – Bloomberg (Jean-Michel Paul): “With such high turnout in Sunday’s first-round presidential vote, one thing that would seem to be working in France is democracy. But a recent survey revealed that 70% of French voters believe that democracy does not work well in France. Only 11% trust political parties and 24% trust the media… In this context, the big question facing the next French president is whether he -- as it almost certainly will be Emmanuel Macron -- can keep the social peace in a country that is seething with divisions and has a long history of airing them on the streets. The signs of pent-up social discontent are everywhere. Some 63% of young French claim to be ready for a ‘large-scale revolt.’ The head of France’s general directorate for internal security warned, in a parliamentary commission deposition last year, that the country was ‘on the verge of civil war.’ The numbers of days lost to strike action is the largest among comparable countries; 40,000 cars are set ablaze annually in France’s often ghettoized suburbs.”

April 28 – Bloomberg (Jana Randow): “Euro-area inflation bounced back to a level in line with the European Central Bank goal and underlying price growth surged, setting up a debate about an exit from unconventional stimulus that may lead to a policy signal in June. Consumer prices rose an annual 1.9% in April after gaining 1.5% in March… Core inflation, a measure that excludes volatile components such as food and energy prices, jumped to 1.2%, the most in almost four years and stronger than anticipated.”

April 24 – Bloomberg (Piotr Skolimowski): “German business sentiment rose to the strongest level in almost six years in a sign that the momentum in Europe’s largest economy is set to continue. The… Ifo institute’s business climate index increased to 112.9 in April from a revised 112.4 in March.”

Global Bubble Watch:

April 25 – Bloomberg: “The Chinese and U.S. stock markets are going in opposite directions. An intensifying crackdown against leverage in Asia’s biggest economy has rocked the hither-to unflappable Shanghai Composite Index over the past week, sending it to a three-month low last session. In the U.S., the largest equity market is embracing a risk rally spurred by the French election, with the S&P 500 Index continuing to build on reflation-trade gains ignited by Donald Trump’s November victory. The divergence means the two markets are the least in tune since August 2008 -- just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system.”

April 25 – Financial Times (Robin Wigglesworth): “There goes the fear – again. Wall Street’s ‘fear gauge’ is heading towards its lowest closing level in three years, after the first round of the French presidential election calmed investor nerves over another populist upset, and US President Donald Trump promised to cut the US corporate tax rate to 15%. The Chicago Board Options Exchange’s Volatility Index, known as Vix…, tracks the prices of short-term options on the S&P 500. It is designed to reflect how turbulent investors think the US stock market will be over the next 30 days.”

April 24 – Bloomberg (Greg Quinn): “Optimism about home prices reached an all-time high in Canada just as policy makers stepped in to curb runaway prices in the country’s largest city. The share of respondents in the weekly Bloomberg Nanos Canadian Confidence Index who see home prices rising in the next six months climbed to 48.5 percent, the most in records back to mid-2008… ‘Bullish sentiment on real estate in Canada continues to drive consumer confidence,’ said Nanos Research Group Chairman Nik Nanos.”

April 27 – Bloomberg (Tom Beardsworth): “Europe’s leveraged loan market is on pace for the busiest year since the financial crisis as borrowers take advantage of investor demand for income that moves with benchmark rates. Companies… have agreed about 56 billion euros ($61 billion) of leveraged loans in Europe this year… That’s the most for the same period since 2013 and set for the biggest annual total since 2007 if the pace continues.”

Federal Reserve Watch:

April 24 – Bloomberg (Matthew Boesler): “The so-called neutral U.S. interest rate fell in the final three months of 2016, according to a widely-cited estimate produced by Fed economist Thomas Laubach and San Francisco Fed President John Williams. The theoretical rate -- which is adjusted for inflation and would neither stimulate nor restrict an economy growing on trend -- declined to roughly zero from 0.2%. The drop, which reverses a slightly rising trend in the last three quarters, suggests the Fed may not be providing as much stimulus as officials previously thought. Its benchmark rate, adjusted for core inflation, is currently -0.8%.”

U.S. Bubble Watch:

April 25 – Bloomberg (Sid Verma): “Markets are taking sides when it comes to the direction of the U.S. economy. In the green corner are stocks. The Standard & Poor’s 500 index is just 0.2% away from a record high reached in March on bets that Donald Trump’s administration will push through tax-code changes to spark growth. In the red corner sit U.S. government bonds, where benchmark 10-year Treasury yields have unwound almost half of their post-election increase, suggesting a far more pessimistic view the economy. ‘The increasing divergence between global equity market performance and bond markets has raised questions as to whom is right,’ Jefferies… analysts led by Sean Darby wrote…”

April 26 – Wall Street Journal (Laura Kusisto): “The U.S. housing market’s red-hot recovery from the depths of the crash five years ago is fueling concerns among economists and real-estate brokers that home prices are overheating. A dearth of new construction and strong demand from buyers are pushing up prices twice as fast as the rate of income growth... The S&P CoreLogic Case-Shiller U.S. National Home Price Index… showed that in February home prices rose 5.8% from the same month a year earlier. That put prices nearly 40% above their level at the bottom of the housing crash in February 2012. At the same time, incomes rose 3% in February from the same month a year earlier, and are up 12% since February 2012… Some local markets have experienced extreme swings. Home prices in San Francisco have vaulted 98% from their low point during the bust and now stand nearly 7% above their earlier record in 2006… In Dallas, home prices have risen by nearly 53% from their low during the recent bust and are now 35.5% above their previous high. In Denver, prices are now 59% above their previous lows and 36.5% above their previous high.”

April 26 – Bloomberg (Vincent Del Giudice and Wei Lu): “America’s working class is falling further behind. The rich-poor gap -- the difference in annual income between households in the top 20% and those in the bottom 20% -- ballooned by $29,200 to $189,600 between 2010 and 2015… Computers and robots are taking over many types of tasks, shoving aside some workers while boosting the productivity of specialized employees, contributing to the gap.”

April 27 – Bloomberg (Charles Stein): “Exchange-traded funds are ‘weapons of mass destruction’ that have distorted stock prices and created the potential for a market selloff, according to the managers of the FPA Capital Fund. ‘When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now,’ Arik Ahitov and Dennis Bryan… said… The flood of money into passive products is making stock prices move in lockstep and creating markets increasingly divorced from underlying fundamentals, the managers said.”

April 24 – CNBC (Diana Olick): “Spring homebuyers are pounding the pavement at a furious pace, but the pickings are getting ever slimmer. Even as more homes come on the market for this traditionally popular sales season, they're flying off fast, with bidding wars par for the course. Home prices have now surpassed their last peak, and at the entry level, where demand is highest, sellers are firmly in the driver's seat. ‘I've been selling real estate for 25 years and this is the strongest seller's market I have ever seen in my entire real estate career,’ said David Fogg, a real estate agent with Keller Williams in Burbank, California. ‘A lot of our sellers are optimistically pricing their homes in today's market, and I have to say in most cases we're getting the home sold anyway.’”

April 24 – Wall Street Journal (Laura Kusisto): “Mortgage rates dropped below 4% for the first time since November, providing more kindling to an already hot housing market as the crucial spring selling season gets under way. The average rate on a 30-year fixed-rate mortgage dropped to 3.97% for the week ended April 20, from 4.08% a week earlier and 4.3% in mid-March… The drop could help encourage buyers who had been put off by rising mortgage rates to dive into the market and prompt others to rush to buy homes before rates rise again. ‘We are in the spring, and people are out looking to buy homes,’ said Len Kiefer, deputy chief economist at Freddie Mac. ‘These low rates are really going to help out with affordability.’”

April 25 – Bloomberg (Michelle Jamrisko): “Home prices in 20 U.S. cities accelerated in the year through February for a fifth month, while nationwide property values also picked up, according to S&P CoreLogic Case-Shiller… 20-city property values index climbed 5.9% from February 2016 (forecast was 5.8%), the fastest since July 2014, after increasing 5.7% in the year through January. National home-price gauge rose 5.8% in the 12 months through February…”

April 25 – Bloomberg (Patricia Laya): “Purchases of new U.S. homes unexpectedly increased in March to an eight-month high, indicating housing demand remained strong at the start of the spring buying season… Single-family home sales increased 5.8% to a 621,000 annualized pace (median forecast… 584,000 rate). The median sale price of a new house rose 1.2% from March 2016 to $315,100. Supply of homes shrank to 5.2 months from 5.4 months.”

April 27 – Wall Street Journal (Laura Kusisto): “For the first time in a decade, more new U.S. households in the first quarter chose to buy homes than to rent, suggesting a long-term decline in homeownership rates might be coming to an end. Some 854,000 new-owner households were formed during the first three months of the year, more than double the 365,000 new-renter households formed during the period, the Census Bureau said… That is the first time since the third quarter of 2006 that the number of new homeowners outstripped that of new renters…”

April 28 – Bloomberg (Sho Chandra): “The U.S. economy expanded at the slowest pace in three years as weak auto sales and lower home-heating bills dragged down consumer spending, offsetting a pickup in investment led by housing and oil drilling. Gross domestic product, the value of all goods and services produced, rose at a 0.7% annualized rate after advancing 2.1% in the prior quarter…”

April 25 – Bloomberg (Josh Mitchell): “Millions of U.S. parents have taken out loans from the government to help their children pay for college. Now a crushing bill is coming due. Hundreds of thousands have tumbled into delinquency and default. In the process, many have delayed retirement, put off health expenses and lost portions of Social Security checks and tax refunds to their lender, the federal government… The problem is the government asks almost nothing about its borrowers’ incomes, existing debts, savings, credit scores or ability to repay. Then it extends loans that are nearly impossible to extinguish in bankruptcy if borrowers fall on hard times.”

April 28 – Bloomberg (Sho Chandra): “U.S. employment costs rose in the first quarter by the most since the final three months of 2007 as both worker pay and benefits accelerated, the Labor Department said… Employment cost index advanced 0.8% (forecast was 0.6%) after a 0.5% gain in the prior three months… Total compensation, which includes wages and benefits, rose 2.4% over the past 12 months.”

April 24 – Bloomberg (Kim Bhasin): “Retailers are filing for bankruptcy at a record rate as they try to cope with the rapid acceleration of online shopping. In a little over three months, 14 chains have announced they will seek court protection, according to… S&P Global Market Intelligence, almost surpassing all of 2016. Few retail segments have proven immune as discount shoe-sellers, outdoor goods shops, and consumer electronics retailers have all found themselves headed for reorganization.”

April 25 – Wall Street Journal (Deepa Seetharaman): “Yahoo Inc. Chief Executive Marissa Mayer is set to reap some $187 million from her shareholdings as a result of the internet company’s sale of its core business to Verizon… The hefty payout comes despite Ms. Mayer’s inability to accomplish what she was hired to do five years ago: revitalize the fading internet icon after its struggles with high employee and executive turnover and declines in ad revenue.”

EM Watch:

April 28 – Bloomberg (Bruce Douglas and David Biller): “Millions of Brazilians were stranded without public transport and faced shuttered banks and schools on Friday as labor unions staged a nationwide strike against President Michel Temer’s reform agenda. Buses and trains were down in several major cities, including Sao Paulo. The access road to airports in Rio de Janeiro and Brasilia were temporarily blocked by protesters but, barring some delays and cancellations, flights around the country continued to operate. Police cordoned off the main avenue crossing government quarters in the nation’s capital Brasilia in anticipation of protests later in the day.”

Geopolitical Watch:

April 26 – AFP: “China has launched its first domestically designed and built aircraft carrier, state media said…, as the country seeks to transform its navy into a force capable of projecting power onto the high seas. Adorned with colourful ribbons, the Type 001A ship ‘transferred from dry dock into the water at a launch ceremony’ in the northeastern port city of Dalian…’”

April 21 – Reuters (Vikram Subhedar): “The $1 trillion of financial assets that central banks in Europe and Japan have bought so far this year is the best explanation for the gains seen in global stocks and bonds despite lingering political risks, Bank of America Merrill Lynch said on Friday. If the current pace of central bank buying, dubbed the ‘liquidity supernova’ by BAML, continues through the year, 2017 would record their largest financial asset purchases in a decade…”

A strong case can be made that Q1 2017 experienced the most egregious monetary stimulus yet. No financial or economic crisis – and none for years now. Consumer inflation trends have turned upward on a global basis. Stock prices worldwide have surged higher, with U.S. and other indices running to record highs. At the same time, global bond yields remained just off historic lows. Home prices in many key global markets have spiked upward. Meanwhile, central bank balance sheets expanded at a $3.6 TN annualized pace (from BofA) over the past four months.

With U.S. bond yields reversing lower of late, there’s been a fixation on weaker-than-expected Q1 U.S. GDP. Meanwhile, recent data have been stronger-than-expected in China, Europe and Japan. EM has been buoyed by strong financial inflows and a resulting loosening of financial conditions. Thus far, Fed baby-step normalization efforts have been overpowered by the “liquidity supernova”.

April 21 – Reuters (Balazs Koranyi): “Global growth and trade appear to be picking up strength but risks for the euro zone economy remain tilted to the downside, so 'very substantial' accommodation is still necessary, European Central Bank President Mario Draghi said on Friday. In a statement largely reflecting the bank's March policy statement, Draghi said that while the risk of deflation has largely disappeared, underlying inflation has shown no convincing upward trend.”

April 20 – Reuters (Leika Kihara): “Japan has benefitted from global tailwinds that boosted exports and factory output, [Bank of Japan Governor Haruhiko] Kuroda said, describing its economy as ‘expanding steadily as a trend’ - a more upbeat view than last month. But he offered a bleaker view on Japan's inflation, saying it lacked momentum with no clear sign yet it was shifting up. ‘That's why the BOJ will continue its ultra-easy monetary policy to achieve its 2% inflation target at the earliest date possible,’ he said.”

Bank of Japan Governor Haruhiko Kuroda, responding to a question from Bloomberg Television's Francine Lacqua: “The inflation rate continues to be quite sluggish. Although the real economy is improving – doing better than we anticipated just a few months ago. Like the IMF – the IMF itself also made up the [global growth] rate this time compared to the January figure. So, as far as the Japanese economy is concerned, yes the economy is doing better than we anticipated…, but the inflation front has not much improved, unfortunately.”

Mr. Kuroda is quick with a smile and carries an infectious laugh; seems like a nice guy. Seeing his big grin after stating “the inflation front has not much improved, unfortunately,” I couldn’t help but think he’s not at all unhappy with inflation stuck below target. And why not? The BOJ can proceed with its historic experiment in government debt monetization, in the process administering more liquidity upon a global system already inundated with central bank “money”. The Fateful Day of Reckoning and attendant very difficult decisions – for Japan and the rest of the world – can be relegated to some future date. Historians will surely appreciate what few are willing to admit today: it’s crazy that Haruhiko Kuroda has come to wield such incredible power over global finance and securities markets.

Japan and Europe confront deep structural issues. In particular, Japan faces an aging population and a conservative, high-savings society. It remains a powerful manufacturer and runs persistent Current Account surpluses. In the face of unprecedented debt monetization, the yen has proven impressively resilient. What’s more, the yen’s 7% y-t-d gain (vs. $) will not be supportive of the BOJ attaining its inflation target. As for the ECB’s Draghi, it’s even more difficult to argue that low inflation remains a scourge worthy of “whatever it takes.” Yet he’s obviously in no rush to rethink his aggressive printing operations – no hurry whatsoever to face his Day of Reckoning.

Here at home, inflationary biases throughout asset markets have over recent months turned increasingly robust. Stock prices surged to record highs, while home price inflation picked up steam as sales transactions escalated to the strongest pace since 2007. Debt issuance has been running at a record rate. In spite of it all, Fed chair Yellen has been quick to note that inflation remains “slightly” below the Fed’s 2% target. Rather quickly the markets question whether the Yellen Fed has the fortitude for a couple additional baby-step rate increases this year.

Can we all agree that this central bank fixation on a 2% consumer price inflation target is borderline ridiculous? Consumer price dynamics have changed momentously over the past 20 years. Most importantly, the technology revolution has basically created an unlimited supply of goods and services. From smart phones and tablets to digital downloads, companies can now easily expand output to meet heightened demand. There has been as well the equally momentous move to “globalization” – with seemingly limitless cheap labor coupled with unlimited cheap finance fundamentally boosting the supply of inexpensive goods and services globally.

Technological advancement has played a profound role in oil extraction, new energy technologies and energy conservation. There are as well advancements in pharmaceuticals and healthcare more generally. Even in basics like food, there is a proliferation of higher-priced organic and healthy-choice products. And somehow government economists are adept at constructing models and calculating hedonic adjustments to come to an accurate measure of true underlying CPI? And this single contrived data point has become key to policies that amount to a historic experiment in global activist monetary management? Wow.

I’m reminded of the mortgage finance Bubble period with chairman Greenspan supposedly fretting that booming housing markets were impervious to Fed “tightening” measures. I recall writing in the CBB at the time, “Greenspan could easily resolve this issue with two phone calls, and they’d both be local.” Fannie and Freddie were clearly at the heart of a historic Bubble in mortgage finance. Yet no one was willing to call the Fed out on the reckless GSEs and the powerful distortions emanating from the market embrace of the implied Washington backing of agency obligations.

These days, virtually no one is willing to call out global central bankers on their notion that there is basically no limit to measures to be employed to achieve 2% CPI bogeys. Zero rates, negative rates, Trillions of monetization, acquire equities and corporate debt, market yield manipulation, etc. Risk be damned. Everyone is content to disregard that central banks have inflated epic Bubbles almost everywhere across virtually all asset classes – and they’re trapped.

The entire contemporary notion of “inflation” is deeply flawed. Years ago, I adopted the “Austrian” view: start with the expansion of Credit – “Credit/monetary inflation” – and then diligently monitor for price effects and inflationary consequences associated with the resulting increase in purchasing power.

Inflation can arise in myriad forms: rising consumer and producer prices; higher asset values and market distortions; increasing corporate profits and investment; trade and Current Account deficits; etc. And, as the late Dr. Kurt Richebacher was so great at explaining, consumer prices were generally the least threatening inflationary manifestation. Central bankers could and would squeeze consumer inflation with tighter policy. Asset inflation, on the other hand, would be allowed (even nurtured) to develop into Bubbles that would inflate to the point of imparting deep structural (financial and economic) maladjustment. As we’ve witnessed for over twenty years now, there’s no constituency for thwarting rising asset prices.

After experiencing the mortgage finance Bubble fiasco, it’s difficult to comprehend that global central bankers have so aggressively embraced and promoted asset inflation. Central bankers have been hoping for modest self-reinforcing inflation in a general price level. General price inflation would, so the thinking goes, spur a commensurate increase in Credit that would support ongoing moderate increases in CPI.

Well, it may have worked that way in the past but no longer. Central banks have ensured that the powerful inflationary biases reside throughout the asset markets. These days, monetary inflation works predominately to stoke asset inflation and Bubbles, with major ramifications for ongoing inequitable wealth distribution and system fragility more generally. Deep structural impairment will be revealed when the Bubble falters, a dynamic that clearly reverberates these days throughout global bond markets.

April 20 – Reuters (David Morgan): “U.S. President Donald Trump's tax reform plan will rely largely on future revenue gains from faster economic growth to justify major tax cuts, top Trump advisers said… As Trump's first 100 days in office draw to a close, the disclosure is the latest sign that the White House could part ways with congressional Republicans who want to pay for tax cuts by taxing imports and eliminating a business tax deduction for debt interest payments. ‘Some of the lowering in (tax) rates is going to be offset by less deductions and simpler taxes,’ Treasury Secretary Mnuchin said…’But the majority of it will be made up by what we believe is fundamentally growth and dynamic scoring,’…”

During the late-nineties Bubble period, there was ruminating over fiscal surpluses that were expected to extinguish much of outstanding Treasury debt. It was all a Bubble mirage. Anyone contemplating a U.S. government $20 TN in the whole would have been viewed as a complete nut case. And here we are again in the heart of a historic Bubble, with Washington politicians talking about big tax cuts paid for with future revenues. The scope of prospective post-Bubble deficits is almost difficult to fathom.

Sunday’s first round French election will be captivating. A Marine Le Pen versus Jean-Luc Mélenchon second round would be a big issue for the markets. Markets Friday were somewhat concerned that Le Pen could receive a boost after this week’s terrorist shooting on Paris’ Champs- Élysées. For the most part, however, players were heartened by polls showing centrist Emmanuel Macron somewhat widening his narrow lead over Le Pen. Both François Fillon and Mélenchon remain within striking distance.

Crude was slammed almost 7%, as the GSCI commodities index sank 4.6% this week. And while OPEC remains an ongoing issue, China seemed to be at top of mind. It’s almost as if every headline related to tighter Chinese regulation – real estate finance, shadow-banking, wealth management products, insurance, corporate debt and repo leverage, Internet finance, the stock market – seems to help reawaken market fears of latent system fragilities. Timid policymaking has not only not worked, it’s has emboldened Bubble excess. Tough policies will be necessary but risk bursting the Bubble.

It’s evolved into a global issue: There’s no cure for major asset Bubbles other than unwinds. Once asset inflation becomes the prevailing inflationary manifestation it becomes impossible to inflate away the problem. Instead, central bank efforts to spur general inflation only exacerbate Bubbles and maladjustment. That’s The Big Ugly Flaw in this runaway global monetary experiment. Back when he served as president of the Dallas Fed, Richard Fisher espoused some cogent advice for global central bankers: The law of holes – when you find yourself in a hole, first you must stop digging. Well, the problem today is that instead of heeding Fisher’s “stop digging” they came together, called in the big backhoes and have been shoveling fanatically ever since.

Bloomberg's Francine Lacqua: “Do you worry - you’ve used a lot of tools – a lot of unconventional tools. Do you worry about your balance sheet – in terms of GDP it’s higher than that Fed’s.”

Bank of Japan Governor Haruhiko Kuroda: “Yes. We have acquired about 40% of JGBs outstanding. Which means about 80% of GDP equivalent of JGBs we have acquired. But this is a result of the quantitative and qualitative monetary easing, and we think that we can manage the enlarged balance sheet in a reasonable manner. Of course, once we exit from the QQE with yield curve control, we’ll have to consider how to deal with an enlarged balance sheet. But, like the Fed, I think we can manage the enlarged balance sheet in a reasonable way.”

Lacqua: “When is the ideal time to start talking about it [exiting QQE]?”

Kuroda: “It’s too early… Because our target rate is 2% - we’re still around zero percent inflation rate. So it’s a long way to go. So although we forecast that the inflation rate would gradually rise to our 2% and reaching the target sometime around fiscal 2018, it’s a long way to go. So, at this stage it’s premature to discuss in an exact way about an exit strategy.”

Lacqua: “Governor, what have you learned in your time as head of the BOJ? I don’t know if it is easier or more difficult than you thought to manage this complicated economy.”

Kuroda: “It’s maybe of course challenging, depending on the economic and market conditions when the BOJ starts to exit from the current QQE and yield control. But I think it can be managed in a reasonable way. So I have no particular concern about the increased balance sheet or negative interest rates on the short end. No.”

April 18 – Bloomberg (Steve Matthews and Matthew Boesler): “Goldman Sachs… has finally dumped the dollar. The U.S. investment bank closed one of its top trade recommendations for 2017 -- long-dollar positioning against the euro, the sterling, and the Chinese yuan -- citing a slowdown in the reflationary momentum in the U.S. economy. ‘In recent years we have generally maintained a bullish dollar view, and the greenback still has a number of things going for it, including a healthy domestic economy, an active central bank, and lower political uncertainty compared with the U.K. and euro area,’ Goldman economist Zach Pandl wrote… ‘However, a number of fundamentals have changed on the margin, such that the long-dollar story no longer warrants a place among our ‘Top Trades.’’”

The U.S. dollar index declined 0.5% to 99.98 (down 2.4% y-t-d). For the week on the upside, the South African rand increased 2.5%, the British pound 2.4%, the euro 1.0%, the Swiss franc 0.9%, the Swedish krona 0.5%, the South Korean won 0.5%, the New Zealand dollar 0.3% and the Singapore dollar 0.1%. For the week on the downside, the Mexican peso declined 1.5%, the Canadian dollar 1.3%, the Norwegian krone 1.0%, the Australian dollar 0.5% and the Japanese yen 0.4%. The Chinese renminbi was little changed versus the dollar this week (up 0.87% y-t-d).

April 16 – Wall Street Journal (John D. McKinnon): “A senior Trump administration official warned Sunday that North Korea’s provocative behavior ‘can’t continue,’ and said the U.S. is working with partners including China to develop a range of possible responses to future ‘destabilizing behavior.’ ‘It’s really the consensus with the president, our key allies in the regions—Japan and South Korea in particular, but also the Chinese leadership—that this problem is coming to a head,’ White House national security adviser Lt. Gen. H.R. McMaster said… ‘And so it’s time for us to undertake all actions we can, short of a military option, to try to resolve this peacefully.’”

April 20 – Reuters (Ju-min Park): “North Korean state media warned the United States of a ‘super-mighty preemptive strike’ after U.S. Secretary of State Rex Tillerson said the United States was looking at ways to bring pressure to bear on North Korea over its nuclear programme… The Rodong Sinmun, the official newspaper of the North's ruling Workers' Party, did not mince its words. ‘In the case of our super-mighty preemptive strike being launched, it will completely and immediately wipe out not only U.S. imperialists' invasion forces in South Korea and its surrounding areas but the U.S. mainland and reduce them to ashes,’ it said.”

April 19 – Politico (Josh Dawsey and Jake Sherman): “The White House, under internal pressure to show legislative achievements ahead of the 100-day mark, is gearing up for a government shutdown fight to secure money for a border wall, more immigration enforcement officers and a bigger military, according to White House and congressional sources… It is a risky gambit. With almost uniform Democratic opposition to nearly all of the Trump administration's spending proposals, the fight could lead to a government shutdown next Friday — the day government spending expires… Officials could also strike a one-week compromise, giving them more time for a broader agreement.”

April 19 – Bloomberg (Billy House and Anna Edgerton): “There may be only one way for Speaker Paul Ryan to avoid a government shutdown: Ask his Democratic counterpart, Nancy Pelosi, for help. The problem is, the two don’t have much history of deal-making together. They don’t even know each other that well. But after spending weeks trying -- so far unsuccessfully -- to ram through legislation to undo Democrats’ signature health-care law, Ryan will almost certainly need Pelosi’s support to keep the government open after April 28, when current funding expires. Ryan and Pelosi have dined together only once… The distance between the pair, who are separated in age by three decades, also reflects how little time House Republicans have spent negotiating with Democrats in recent years.”

April 20 – Wall Street Journal (Peter Nicholas, Kate Davidson and Nick Timiraos): “White House officials said Thursday they are developing a sweeping plan to overhaul both corporate and individual taxes, dismissing concerns that a more modest proposal might be more viable in today’s political climate. Speaking at a conference of international financial firms, Treasury Secretary Steven Mnuchin said the administration would release its tax overhaul ‘very soon.’ The remarks ended weeks of mixed signals from the White House about the breadth of President Donald Trump’s plan, and came as some of his former campaign advisers cautioned against an aggressive approach”.

April 17 – Reuters (Laharee Chatterjee): “U.S. Treasury Secretary Steven Mnuchin said the Trump administration’s timetable for tax reform is set to falter following setbacks in negotiations with Congress over healthcare, the Financial Times reported… Mnuchin told the Financial Times… that the target to get tax reforms through Congress and on President Donald Trump's desk before August was ‘highly aggressive to not realistic at this point’. ‘It is fair to say it is probably delayed a bit because of the healthcare,’ Mnuchin told the newspaper.”

April 19 – Reuters (David Milliken): “U.S. President Donald Trump is ‘absolutely not’ trying to talk down the strength of the dollar, Treasury Secretary Steven Mnuchin was quoted as saying in the Financial Times… Trump said last week in an interview with the Wall Street Journal that the dollar was ‘getting too strong’, and backed away from labelling China a currency manipulator. Mnuchin had played down that comment on the dollar… In a more detailed version published on Wednesday, he directly rejected the idea that Trump was trying to talk down the dollar, saying ‘Absolutely not, absolutely not.’”

April 17 – Reuters (James Oliphant and Svea Herbst-Bayliss): “In a White House marked by infighting, top economic aide Gary Cohn, a Democrat and former Goldman Sachs banker, is muscling aside some of President Donald Trump's hard-right advisers to push more moderate, business-friendly economic policies. Cohn, 56, did not work on Republican Trump's campaign and only got to know him after the November election, but he has emerged as one of the administration's most powerful players in an ascent that rankles conservatives…”

April 20 – Reuters (Pete Schroeder): “The head of the U.S. House of Representatives' banking panel has unveiled the Republicans' most ambitious plan so far to loosen financial regulations, a 600-page bill to replace the Dodd-Frank financial reform law. Representative Jeb Hensarling, who chairs the House Financial Services Committee, also set an April 26 hearing to discuss replacing the 2010 law. ‘Republicans are eager to work with the president to end and replace the Dodd-Frank mistake with the Financial CHOICE Act because it holds Wall Street and Washington accountable, ends taxpayer-funded bank bailouts, and unleashes America’s economic potential,’ the Texas Republican said…”

April 18 – New York Times (Vindu Goel): “President Trump signed an executive order… that directs federal agencies to review employment immigration laws to promote ‘Hire American’ policies. The order makes no immediate changes to work visa programs but tells the Departments of Labor, Justice, Homeland Security and State to study existing laws and procedures and recommend changes. In the case of one program, H-1B temporary visas, the order directs the agencies to suggest changes to help ensure that the visas are awarded to the most skilled, best-paid immigrant workers.”

China Bubble Watch:

April 17 – Bloomberg: “The value of China’s home sales remained buoyant in March, though volume figures indicated that curbs in a number of cities may be slowing the recent buying frenzy. New home sales by value rose 18% to 1 trillion yuan ($145bn) last month from a year earlier… The increase compares with a 23% surge in the first two months of the year.”

April 17 – Bloomberg: “China home prices rose in the most cities since October, suggesting buyers are trying to get in ahead of any further restrictions on property purchases. New-home prices, excluding government-subsidized housing, gained last month in 62 of the 70 cities tracked by the government, compared with 56 in February… Prices fell in eight cities… Chinese authorities have pledged to enforce strict curbs in most first- and second-tier cities to prevent a housing bubble, while seeking to clear a glut of unsold homes in smaller urban centers.”

April 17 – Reuters (Kevin Yao and Yawen Chen): “Real estate investment in China remained robust in the first quarter from a year earlier…, as the pace of new construction quickened, despite intensified government cooling measures. Growth in property investment, which includes residential, commercial and office spaces, accelerated to 9.1% from 8.9% in the first two months of 2017… In March alone, property investment growth rose to 9.4%...”

April 17 – Bloomberg: “China’s economy accelerated for a second-straight quarter as investment picked up, retail sales rebounded and factory output strengthened amid robust credit growth and further strength in property markets. Gross domestic product increased 6.9% in the first quarter from a year earlier… It was the first back-to-back acceleration in seven years… Fixed-asset investment excluding rural areas expanded 9.2% for the first three months, accelerating from 8.1% growth last year. Retail sales increased 10.9% from a year earlier in March…”

April 18 – Financial Times (Gabriel Wildau): “China's new chief banking regulator has started with a bang, issuing a flurry of new policy directives during his first month aimed at the industry's knottiest problems, in line with the government’s focus this year on managing financial risk. The China Banking Regulatory Commission has issued seven policy documents in the past 12 days, in what state news agency Xinhua is calling a ‘regulatory windstorm’… ‘Without a doubt, 2017 will be a big year for financial regulation. Regulation of the entire banking industry will become stricter and enforcement will become more rigorous,’ Sun Binbin, chief fixed-income analyst at TF Securities in Shanghai, wrote…’What we’ve seen so far is just framework. The detailed rules are yet to come.’”

April 20 – Wall Street Journal (James T. Areddy): “The Chinese government is trying to ensure financial-system stability in a pivotal political year by focusing on the officials who do the regulating. China has removed three of its four top financial-industry regulators over the past year or so as it also tightens the reins on banks, brokerages and insurers. The latest to fall was liberalizing insurance regulator Xiang Junbo, who jazzed up a stodgy business but caused ripples beyond his agency’s purview. After encouraging liberalization for banks, brokers and insurers in hopes of fueling a slowing economy, Beijing is becoming increasingly anxious about possible financial shock. The new message for its regulators: back to basics.”

April 20 – Bloomberg: “China’s regulators will consider potential market impacts when they introduce additional regulations on the shadow banking sector, according to a top central bank researcher. Any new rules on wealth management products and other asset management offerings will be rolled out gradually, Ma Jun, chief economist of the research bureau of the People’s Bank of China, said… The rebounding economy has created room for expedited structural reforms, Ma said. To curb risks in shadow banking… regulators are working to draft sweeping new rules…”

April 17 – Bloomberg: “China’s market for wealth management products is due for some pain as officials tighten regulations on the sector amid their campaign to curb financial risk, says the head of the nation’s third-largest mutual fund manager. Some holders of the products -- popular among individual investors for their high yields -- hold the ‘very dangerous assumption’ that the government will step in to support WMPs if they get in to trouble, said Tang Xiaodong, chief executive officer of China Asset Management Co…‘The WMPs have been developing a little too fast, too soon,’ Tang said… ‘That’s why the tightening of those regulations is a step in the right direction.’”

April 17 – Wall Street Journal (Shen Hong): “China’s riskiest corporate bonds are looking disproportionately expensive, a worrying sign that investors may have underestimated their risk as a tighter monetary policy and painful industrial restructuring weaken companies’ ability to repay debt. The unexpected popularity of bonds with low credit ratings in recent months, despite expectations of rising debt defaults and Beijing’s pledge to reduce leverage in financial markets, is the latest example of the constant anomalies in the world’s third-largest but still underdeveloped $9 trillion bond market.”

April 17 – Bloomberg: “China’s dollar bond market has a diversity problem. As borrowers raised a record $51.7 billion in dollar-denominated debt this year, Chinese banks bought about half of the notes, according to UBS… U.S.-based money managers only got access to 7% of the deals, down from 46% in 2014… The domination of China-based investors is fueling angst about the potential fallout if they all get cold feet at once, especially with $195 billion of dollar notes maturing over the next three years. Risk of a regulatory crackdown on wealth management products and a strengthening yuan are near the top of the worry list…”

April 20 – Reuters (Kevin Yao): “Capital outflows from China eased sharply in the first quarter and cross border flows were more balanced, the foreign exchange regulator said…, in the latest official comments indicating policymakers are growing less worried about the yuan currency. Reduced pressure from outflows has helped steady the yuan this year and brought China's foreign currency reserves back over the closely watched $3 trillion mark.”

April 18 – Reuters: “China's non-financial outbound direct investment (ODI) slumped 30.1% in March from a year earlier as authorities kept a tight grip on capital outflows… Non-financial ODI totalled $7.11 billion last month... For the first three months of this year, non-financial ODI tumbled 48.8% to $20.54 billion from the same period last year.”

Europe Watch:

April 19 – Wall Street Journal (Mike Bird and Christopher Whittall): “With the start of the French election just days away, investors are contemplating their nightmare scenario: a choice between far-left and far-right candidates. In recent days, a surge in opinion polls has placed Jean-Luc Mélenchon, a left-wing firebrand who promises higher wages and fewer working hours, as a potential candidate to move past this Sunday’s first round of voting. That could set up a second-round vote in May 7 with Marine Le Pen, an economic nationalist who wants to pull France out of the euro. Most analysts still expect a mainstream candidate to make it through to the second round and eventually clinch the presidency. But Mr. Mélenchon’s sudden rise has spooked investors just five days before voting kicks off.”

April 17 – Financial Times (Michael Stothard): “As he roared to the crowd, Jean-Luc Mélenchon showed how he has shaken up France’s presidential race as it heads in to the last few days of campaigning before Sunday’s first-round vote. While his rivals were hosting traditional rallies in arenas across the country, the far-left firebrand turned innovative campaigner was addressing a bankside crowd from a boat puttering down a Parisian canal. His supporters cheered wildly as the 65-year-old fan of former Venezuelan leader Hugo Chávez railed against international finance, free trade and the EU while rooting for ‘the people against the oligarchy’. Bankers, Mr Mélenchon said, are ‘parasites’ on society who ‘produce nothing’. Free trade ‘destroys everything’ and leads to the ‘total perversity’ of social dumping. Uber… is a ‘swindle’ that offers work without social protection.”

April 17 – Reuters (Michel Rose): “Presidential candidate Emmanuel Macron urged French voters… to turn the page on the last 20 years and bring a new generation to power, as he stepped up attacks against resurgent far-left and conservative rivals six days before voting day. Macron, a 39-year-old pro-EU centrist who would become the youngest French leader since Napoleon if elected, said recent leaders had betrayed the post-war generation which had rebuilt the country, leaving France unreformed and sclerotic. ‘What has been proposed to the French in the last 20 years is not liberation or reconstruction, but a slow, unavowed acceptation of unemployment, state impotence and social breakdown,’ he told a cheering crowd…”

April 18 – Reuters: “The International Monetary Fund will not take part in a bailout program for Greece if it deems the country's debt is unsustainable, the international lender's chief Christine Lagarde said… Greece needs to implement reforms agreed by euro zone finance ministers earlier this month to secure a new loan under its 86 billion-euro ($91.58 billion) bailout program, the third since 2010. The loan is needed to pay debt due in July, but talks continue and the IMF has not yet decided whether to join the bailout. The fund's participation is seen as a condition for Germany to unblock new funds to Greece.”

April 20 – Reuters (Jonathan Cable): “The euro zone economy bounded into the second quarter with strong broad-based growth, according to a survey showing businesses increased activity at the fastest rate for six years as new orders stayed robust… IHS Markit's Flash Composite Purchasing Managers' Index, seen as a good guide to growth, climbed to 56.7 from March's 56.4, its highest since April 2011.”

April 20 – Bloomberg (Fergal O'Brien): “The European Commission’s consumer-confidence index for the euro area jumped the most in five months in April. The advance put the index at its highest since March 2015, matching the strongest reading since before the financial crisis. The latest figures were far better than economists had anticipated…”

ECB Watch:

April 20 – Bloomberg (Carolynn Look, Jana Randow, and Matthew Boesler): “European Central Bank officials signaled that they’re getting close to the point when they’ll start preparing for the end of an era of unprecedented stimulus. In the last round of speeches before a week-long quiet period ahead of the next policy meeting, Executive Board members Benoit Coeure and Peter Praet agreed that the euro-area recovery has become broad-based… The 25-member Governing Council will debate the precise formulation of its stance on the economy when it decides on interest rates and stimulus settings on April 27. But with a potentially explosive election in France coming this weekend, that may still prove too soon for any change in its currently ultra-cautious tone.”

April 19 – Reuters (Andrea Shalal): “The German government believes an interest rate increase by the European Central Bank (ECB) would help to reduce Germany's often-criticized export surplus, the Funke Mediengruppe newspaper chain reported… The newspaper cited an eight-page paper prepared by the German finance and economics ministries which Finance Minister Wolfgang Schaeuble plans to present at the spring meeting of the International Monetary Fund later this week. Schaeuble is a longtime critic of the ECB's current ultra-low interest rate policy.”

Brexit Watch:

April 19 – Reuters (Elizabeth Piper, Kylie MacLellan and William James): “British Prime Minister Theresa May called… for an early election on June 8, saying she needed to strengthen her hand in divorce talks with the European Union by bolstering support for her Brexit plan. …May said she had been reluctant to ask parliament to back her move to bring forward the poll from 2020. But, after thinking ‘long and hard’ during a walking holiday, she decided it was necessary to try to stop the opposition ‘jeopardizing’ her work on Brexit. Some were surprised by May's move… but opinion polls give her a strong lead and the British economy has so far defied predictions of a slowdown.”

Global Bubble Watch:

April 18 – Bloomberg (Enda Curran, Liz McCormick, and Eric Lam): “After heading into the uncharted territory of quantitative easing, the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening. How the Federal Reserve, European Central Bank and -- eventually -- the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 ‘taper tantrum,’ or the near undetectable market response to China’s run-down of U.S. Treasuries in recent years. Combined, the balance sheets of the three now total about $13 trillion… Former Fed Chair Ben S. Bernanke… has argued for a pre-set strategy to shrink the balance sheet… ‘You know what they say about mountaineering right? The descent is always more dangerous than the ascent,’ said Stephen Jen, …chief executive of hedge fund Eurizon SLJ Capital Ltd. ‘Shrinking the balance sheet will be the descent.’”

April 19 – Reuters (Jamie McGeever): “Stocks, bond yields and the dollar are all falling, yield curves are flattening and sterling is marching higher. The ‘reflation’ trades of 2016 that were supposed to mark a turning point in global markets are fading. Fast. The question for investors is whether this is the play book for the rest of the year, or whether the trends of 2016 will resume in the second half of the year. What is clear is that much of the conviction with which investors went into 2017 has been lost… Trump's surprise election victory was supposed to unleash a wave of tax cuts, banking deregulation and fiscal largesse that would lift U.S. -- and global -- growth. Meanwhile, sterling's 20% plunge after the Brexit vote was supposed to pave the way for a surge in UK equities and inflation.”

April 16 – Financial Times (Chris Flood): “Exchange traded funds attracted record inflows in the first three months of 2017 as investors continue to move out from traditional actively managed funds in protest against inconsistent performance and high fees. Investors worldwide ploughed $197.3bn into ETFs between January and March, a quarterly record… This follows 2016, when ETFs, which are famed for being low cost, gathered the highest ever annual amount of $390.4bn in new cash. Robert Buckland, a strategist at Citigroup, said the surge in ETF growth was a ‘seismic shift’, driven by a ‘profound re-assessment’ among investors about the fees they were prepared to pay asset managers to put money to work in the stock market.”

April 17 – New York Times (Landon Thomas Jr.): “The Vanguard trading floor is the epicenter of one of the great financial revolutions of modern times, yet it is a surprisingly relaxed place. A few men and women gaze at Bloomberg terminals. There is a muted television or two and a view of verdant suburban Philadelphia. No one is barking orders to buy or sell stock. For a $4.2 trillion mutual fund giant that is still growing rapidly, it occupies a small fraction of the space of a typical Wall Street trading hub. You can barely hear the quiet hum of money being invested — money in scarcely imaginable quantities, pouring into low-cost index mutual funds and exchange-traded funds (E.T.F.s) that track financial markets. In the last three calendar years, investors sank $823 billion into Vanguard funds… The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry — more than 4,000 firms in total. All of them combined took in just a net $97 billion during that period…”

April 19 – Financial Times (Ben McLannahan and Eric Platt): “Was Goldman Sachs — of all banks — wrongfooted by the Trump trade? Since the election of Donald Trump in November, the Wall Street bank has seen several senior executives decamp to Washington: none of them more influential than Gary Cohn, the bank’s former president now serving as Mr Trump’s top economic adviser. Despite that apparent edge, the bank was the only one of the US’s top six banks to report disappointing earnings for the first quarter. While rivals were boosted by brighter performances from bond-trading units, Goldman’s revenues from debt trading were basically flat. Analysts and traders say the bank may well have made a big bet that went wrong during the first quarter: the assumption that Mr Trump’s talk of boosting growth would push up interest rates, and thus push down the price of trillions of dollars of corporate bonds.”

April 18 – Bloomberg (Kim Chipman and Maciej Onoszko): “Canadian officials across all three levels of government vowed to be vigilant in monitoring the Toronto region’s rapidly accelerating housing market, including possibly taking formal steps aimed at curbing speculative activity. Federal Finance Minister Bill Morneau, Ontario Finance Minister Charles Sousa and Toronto Mayor John Tory met Tuesday to discuss the thorny question of how to cool the city’s residential real estate market… Possible steps include taxing homes left empty for speculative purposes, Tory said… Home prices in the Toronto area climbed 6.2% in March, the biggest one-month gain on record…, and are up almost 30% over the past 12 months.”

April 17 – Bloomberg: “Australia’s central bank will focus on the performance of the nation’s labor and housing markets in coming months… In minutes of this month’s policy meeting released Tuesday, the Reserve Bank of Australia noted labor market conditions were ‘somewhat weaker than had been expected’… ‘The board judged that developments in the labor and housing markets warranted careful monitoring over coming months,’ the RBA said…”

April 19 – Bloomberg (Dani Burger): “Exchange-traded funds are making stock markets dumber -- and more expensive. That’s the finding of researchers at Stanford University, Emory University and the Interdisciplinary Center of Herzliya in Israel. They’ve uncovered evidence that higher ownership of individual stocks by ETFs widens the bid-ask spreads in those shares, making them more expensive to trade and therefore less attractive. This phenomenon eventually turns stocks into drones that move in lockstep with their industry…The study is the latest to point out signs of diminished efficiency in markets increasingly overrun by the funds.”

Fixed Income Bubble Watch:

April 20 – Financial Times (Eric Platt and Joe Rennison): “Within the US fixed income market, investors are sending a clear message about the prospect of higher interest rates. In recent weeks, investors have pushed back against a string of leveraged loan transactions, with a handful of deals pulled as money flows into the sector have shrunk. The stumbles underline a diminished appetite for richly valued, floating rate loans, seen as providing investors with some protection from a rising interest rate environment.”

April 19 – Financial Times (Shawn Donnan and Gemma Tetlow): “A debt binge has left a quarter of US corporate assets vulnerable to a sudden increase in interest rates, the International Monetary Fund has warned. The ability of companies to cover interest payments is at its weakest since the 2008 financial crisis, according to one measure. The IMF’s twice-yearly Global Financial Stability Report released on Wednesday highlights what economists at the fund see as one of the main risks facing President Donald Trump and his plans to boost US growth via a combination of tax cuts and infrastructure spending.”

April 17 – Reuters (Ernest Scheyder): “Investors who took a hit last year when dozens of U.S. shale producers filed for bankruptcy are already making big new bets on the industry's resurgence. In the first quarter, private equity funds raised $19.8 billion for energy ventures - nearly three times the total in the same period last year… The quickening pace of investments from private equity, along with hedge funds and investment banks, comes even as the recovery in oil prices from an 8-year low has stalled at just over $50 per barrel amid a stubborn global supply glut.”

Federal Reserve Watch:

April 19 – Bloomberg (Wes Goodman): “Traders are pulling back from bets the Federal Reserve will raise interest rates in June as inflation expectations crumble. The odds of a hike have fallen back to about 44% from more than 60% earlier this month… Yields on federal funds futures contracts for June and July are retreating as investors scale back forecasts for a move. Two-year Treasuries, among the most sensitive to Fed policy expectations, are poised for their first two-month rally in a year. Investors are questioning the strength of the U.S. economy and the Fed’s plan to raise rates three times in 2017… They’re also voicing disappointment that President Donald Trump’s proposed tax cuts and infrastructure spending plans have yet to materialize.”

April 20 – Bloomberg (Craig Torres, Rich Miller, and Matthew Boesler): “Don’t bet on the Federal Reserve blinking again. U.S. central bankers appear to be on course to raise interest rates twice more this year and remain confident in their forecast for growth of around 2% despite a series of weak first-quarter reports. That’s a shift from past performance, when they backed away from projected rate increases in the face of unexpected headwinds. Now, the bar for delay is higher.”

April 16 – Wall Street Journal (Nick Timiraos): “The Federal Reserve is moving quickly to fill in the details of how it will wind down its securities holdings in the years ahead, a process that could start this year and become the next big challenge for investors grown accustomed to easy money from the world’s most important central bank. The Fed wants to move toward a smaller portfolio for several reasons. The economy is on stronger footing, leaving less need for support from a large bond portfolio. The large holdings have become a political liability, unpopular in Congress. Moreover, getting started now could relieve pressure on possible new leadership in 2018, when Fed Chairwoman Janet Yellen’s term ends. Finally, officials want room to ramp it back up in a crisis if needed. The Fed moved closer to agreement on the outlines of a plan at their March 14-15 meeting…”

April 18 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of Kansas City President Esther George urged the Federal Open Market Committee to start shrinking its $4.5 trillion balance sheet this year, making reductions automatic and not subject to a quick reversal. ‘Balance sheet adjustments will need to be gradual and smooth, which is an approach that carries the least risk in terms of a strategy to normalize its size,’ George said… ‘Importantly, once the process begins, it should continue without reconsideration at each subsequent FOMC meeting. In other words, the process should be on autopilot and not necessarily vary with moderate movements in the economic data.””

U.S. Bubble Watch:

April 20 – Bloomberg (Katherine Burton and Katia Porzecanski): “Yellen and investors: Be very afraid. The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75% over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be ‘terrifying’ to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference… Jones is voicing what many hedge fund and other money managers are privately warning investors…”

Japan Watch:

April 20 – Bloomberg (James Mayger and Francine Lacqua): “The Bank of Japan will continue with very accommodative monetary policy and maintain the current pace of asset purchases for some time, Governor Haruhiko Kuroda said… While Japan’s economy is doing better than thought a few months ago, the inflation rate is still quite sluggish, Kuroda said… Speaking a week before the BOJ’s next policy meeting, when the board will also update its estimates for growth and consumer prices, he said the exchange rate could affect inflation in the short term and that if the yen appreciates, there is a chance of a delay in hitting his 2% price goal.”

April 19 – Bloomberg (Connor Cislo and Maiko Takahashi): “Japanese exports grew at the fastest rate in more than two years in March, supporting a moderate economic recovery in the face of weak domestic demand. Exports rose 12% from a year earlier (median estimate +6.2%)… Imports jumped 15.8% (median estimate 10%), the biggest gain in more than three years.”

EM Watch:

April 17 – Reuters (Tuvan Gumrukcu and Humeyra Pamuk): “President Tayyip Erdogan declared victory in a referendum on Sunday to grant him sweeping powers in the biggest overhaul of modern Turkish politics, but opponents said the vote was marred by irregularities and they would challenge its result. Turkey's mainly Kurdish southeast and its three main cities, including the capital Ankara and the largest city Istanbul, looked set to vote ‘No’ after a bitter and divisive campaign.”

Geopolitical Watch:

April 18 – BBC: “North Korea will continue to test missiles, a senior official has told the BBC in Pyongyang, despite international condemnation and growing military tensions with the US. ‘We'll be conducting more missile tests on a weekly, monthly and yearly basis,’ Vice-Foreign Minister Han Song-ryol told the BBC's John Sudworth. He said that an ‘all-out war’ would result if the US took military action.”

Disclaimer:

Doug Noland is not a financial advisor nor is he providing investment services. This blog does not provide investment advice and Doug Noland's comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. The Credit Bubble Bulletins are copyrighted. Doug's writings can be reproduced and retransmitted so long as a link to his blog is provided.